Effort and risk-taking in tournaments with superstars – evidence for teams

Abstract

ABSTRACT Competition is often observed between heterogenous teams. Heterogeneity in ability is critical for the effectiveness of different tournament designs. I investigate how the presence of a dominant competitor or superstar does affect the decisions of other competitors in team contests. In particular, I use novel data from top-level professional basketball to investigate the consequences of superstar presence on effort and risk-taking of teams in rank-order contests. To identify the effect, I exploit exogenous variation in superstar dominance, induced by an institutional reform. My results demonstrate that the effect of competing with a superstar on effort does depend on the level of superstar dominance and the number of dominant teams in the contest. For tournaments with a single and clearly dominant superstar team, I find a sizable and significant negative effect of superstar presence on effort of other competing teams. Reduced dominance by the superstar, however, is found to result in a positive peer effect. I also present results for a robust association between competing with a superstar and risk-taking, indicating that a dominant superstar decreases risk-taking. Presence of a weak superstar, however, is estimated to increase risk-taking among other competitors.